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Danske Scandal Has Regulators Fighting Back Against Bank Lobby

(Bloomberg) -- With the Danske Bank A/S scandal fresh in their minds, regulators in Denmark have fought back efforts by the financial industry to water down tougher anti-money laundering rules which are now due to be enforced next month.

As of October, Danish banks will be expected to live up to new guidelines that entail a continual review of risks across all levels of their organization, including systems of governance right down to individual customer accounts. The country’s financial industry had lobbied for a simpler approach, arguing the new setup is too onerous. But the Financial Supervisory Authority says it has rejected the industry’s arguments.

“The banks would have liked to have had a tick-box,” Stig Nielsen, the head of anti-money laundering at the FSA in Copenhagen, said in an interview. “It’s easier for them and easier to explain to clients.”

EU Plans to Beef Up Banking Regulator to Fight Money Laundering

Denmark’s status as one of the world’s least corrupt nations is at stake amid allegations its biggest bank was a central pipeline for channeling billions in illegal funds across Europe. Danske is now the target of criminal investigations in Denmark and Estonia. The allegations point to as much as $9 billion in dirty money, mostly from Russia, making its way through the bank’s Estonian branch between 2007 and 2015.

Danske has already lost about 30 percent of its market value this year as investors grow uneasy at the steady flow of bad news. The bank says it will publish the findings of a lengthy internal probe into the case on Sept. 19. On Wednesday, Danske had another bad day on the stock market and traded close to the bottom of Bloomberg’s index of European financial firms, losing as much as 2 percent.

Meanwhile, government officials are pushing for tougher penalties. Bloomberg surveys of analysts points to a potential fine as big as $800 million for Danske. There’s also speculation as to whether Chief Executive Officer Thomas Borgen, and even board Chairman Ole Andersen, will be forced to step down. Both have apologized for failing to act swiftly to close the non-resident business that was the hub of the alleged laundering.

Europe is now waking up to the need for more to be done to fight money laundering through coordinated efforts across the bloc. On Wednesday, Danish central bank Governor Lars Rohde said the problem is that “individual states have very limited options to fight money laundering on their own, so getting a bigger international engagement in this area will strengthen enforcement.”

The FSA’s new guidelines are part of Denmark’s implementation of Europe’s fourth directive on money laundering, which came into force last year. The measure requires countries to employ the “risk-based approach” advocated by the inter-governmental Financial Action Task Force, which sets international standards.

Last year, the FATF published a scathing analysis of Denmark’s anti-money laundering framework criticizing in harsh terms the country’s shortcomings in preventing such crime. FSA Director General Jesper Berg says he’s made it his goal “never, ever” to get such a bad report again.

Nielsen says that pledge is “really a mantra here.” For the banks that the FSA supervises, that means having to assess risks based on business models, clients, products, and markets, and to consider those risks as they organize operations and monitor customers.

“It’s very important that they react to what’s the normal behavior of a client,” Nielsen said. “They should have been doing this for some years, but in the new legislation it has been more carved out that they have this obligation.”

Danske is just the latest in a string of major banks caught up in money laundering scandals, with Deutsche Bank AG and ING Groep NV among lenders tainted by similar cases.

Last Friday, the European Central Bank reiterated a call for a regional coordinator, as its powers don’t extend to acting against suspicious money flows. That currently falls to national law enforcement authorities in the 19 euro members.

Read here about Europe’s Fifth Anti-Money Laundering Directive

For Danish banks, adopting a risk-based approach won’t be “an easy task,” Nielsen said. “It’s time consuming and a big responsibility to make risk assessments. What if you make the wrong assessment? Will that fall back on you? They felt it would give some legal certainty but that is part of the legislation.”

But Nielsen also says that even the new requirements about to come into force wouldn’t have prevented the laundering alleged to have taken place at Danske. The main issue there was that the governance wasn’t in place, he said, underscoring the regulator’s assessment in a May report,

“If you have a high-risk client, the requirements at that time are the same as now,” he said “They haven’t been changed.”